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 A News Corp. partnership could provide Yahoo with the escape hatch that the Sunnyvale-based company has been seeking since Microsoft pounced with its takeover bid two weeks ago.
If nothing else, the possibility of Yahoo joining forces with one of the world's largest media empires could prompt Microsoft to sweeten its bid, which was originally valued at $44.6 billion, or $31 per share.
Yahoo is believed to want at least $40 per share, or about $56 billion.
The details of the proposed News Corp. alliance were still being worked out Wednesday, according to a person familiar with the situation. The person didn't want to be identified because the talks are considered confidential.
Most analysts believe Microsoft will do whatever necessary to buy Yahoo because the world's largest software maker views the acquisition as the best way to counteract Google Inc.'s dominance of the online search and ad markets
-- a battleground that is rapidly reshaping the technology and media industries.
"Buying Yahoo makes tremendous sense for Microsoft, more sense than any other company in the world," said Ken Marlin, a New York investment banker specializing in media and technology deals.
Both The Wall Street Journal and a prominent blog, TechCrunch, reported that News Corp. is interested in folding its popular online social network, MySpace.com, and other Internet assets into Yahoo
-- an idea that first came up last year. News Corp. owns The Wall Street Journal.
News Corp. and a private equity firm reportedly would buy significant stakes in Yahoo as part of a complex deal designed to push the Sunnyvale-based company's market value toward $50 billion.
A Yahoo spokesman said the company continues to "carefully and thoroughly" evaluate alternatives that will enrich its long-term shareholders. Yahoo's board reportedly is to meet again Thursday or Friday to consider the company's next move.
News Corp. spokeswoman Teri Everett declined to comment on the Yahoo talks.
Yahoo shares climbed 31 cents to $29.88 Wednesday while Microsoft shares gained 62 cents to $28.96 News Corp. shares slipped 10 cents to finish at $19.93.
Based on Microsoft's current market value, its cash-and-stock bid for Yahoo now stands at $29.50 per share, or about $41 billion.
Yahoo rejected Microsoft's offer Monday, saying it "substantially undervalues" assets that include one of the Internet's biggest audiences and best-known brands.
Microsoft has held firm so far, calling its original bid "full and fair" while threatening to launch a hostile takeover attempt.
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 "What's unclear now is whether Yahoo is just trying to get a higher offer or if the company really doesn't want to sell to Microsoft," said Peter Falvey, a technology investment banker with Revolution Partners.
Although News Corp. Chairman Rupert Murdoch unequivocally said during a conference call last week that his New York-based company isn't interested in an outright acquisition of Yahoo, he didn't rule out the possibility of a deal involving MySpace.
When asked whether he might renew the previous discussions with Yahoo about a MySpace alliance, Murdoch replied: "I think that day has passed, but you never know."
A News Corp. stake in Yahoo might hinge on whether the two sides can agree on how much MySpace is worth.
News Corp., which also owns the Fox television and movie studios in addition to its newspaper and Internet holdings, bought MySpace for $580 million in 2005. But the social network's value has soared as its audience has swelled above 100 million users, creating a potential advertising gold mine.
Ironically, Murdoch and his lieutenants can point to a recent Microsoft deal to make a case that MySpace is worth more than $15 billion.
Facebook Inc., which owns the Internet's second largest social network behind MySpace, now arguably has a $15 billion market value, based on Microsoft's purchase late last year of a 1.6 percent stake for $240 million.
Despite its popularity, MySpace hasn't established itself as an effective advertising vehicle. Google last month cited lackluster returns from its ad partnerships with MySpace and other social networks as one of its few disappointments during the fourth quarter.
Besides talking with News Corp., Yahoo also reportedly has explored an advertising partnership with Google, its biggest rival. Although Google probably could help elevate Yahoo's drooping profits, the alliance would likely face antitrust hurdles because the companies operate the Web's two biggest ad networks and eliminating one would reduce competition.
Reports of a possible merger with Time Warner Inc.'s AOL appear to be more rumor than fact, said the person familiar with News Corp. negotiations.
[Associated Press; By MICHAEL LIEDTKE]
AP Business Writer Seth Sutel in New York contributed to this story.
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